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Other Articles
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Estate Taxes
The State of the Federal Estate Tax
By James Stark
CLU, Sagemark Consulting
Like the Perils of Pauline, the final chapter in this thriller has yet to be written. The
best way to sum up where the repeal or modification of the federal estate tax stands
is to repeat the words of Senate Finance Committee ranking minority member Max
Baucus who spoke shortly after the horrific human and financial impact of hurricane
Katrina became apparent, and even before hurricanes Rita and Wilma. He said that
victims of the hurricane should take priority over repealing the estate tax when the
Senate reconvened.
Senator Baucus said, "I am supportive of working on repealing the estate tax. But now is not the
appropriate time."
Shortly following his statement, there was an indefinite postponement of the vote on
estate tax repeal/modification.
It's likely that, particularly in light of the dire warnings of a departing Allan
Greenspan about the burgeoning deficit and a host of other problems, the Federal
Estate Tax will be with us in some form for quite a few more years. Certainly the
political mood in Washington indicates that a total elimination of the tax isn't in the
cards for the foreseeable future.
Some authorities have predicted that, sometime in 2006, there will be a compromise
resulting in an exemption of about $3 or 3.5 million per person—and that the top
rate will settle at 40 or 45 percent.
But because no one can be sure if, when, or to what extent these exemptions and
rates will change, when trying to determine an executor's potential cash needs, the
best advice is probably—“plan for a worst case scenario and hope for the best.” No
surviving spouse or heir ever complained—or sued— because he or she had too
much liquidity.
What we do know:
There's a lot we don't know. But let's take a quick look at what we do know.
First, we know that the amount that a person can pass estate tax-free at death will
increase on January 1, 2006 from $1,500,000 to $2,000,000. That's $4,000,000 per
couple—that can be left to anyone - in any form—completely estate tax free.
Second, if the current schedule does not change, the credit equivalent is scheduled to
increase to $3,500,000 in 2009, that would equate to $7,000,000 per married couple
that can be left at death - estate tax free!
For those wise enough to survive to the year 2010—and die in that year—current law
provides that their estates will pay no federal estate tax. But then, the threshold is
scheduled to drop back down to a mere $1,000,000 in 2011 and thereafter.
Millions can be gift tax free
Consider that, as of January 1, 2006, the annual gift tax exclusion goes up to $12,000
per donee. A middle aged married couple with three children and one grandchild
could - during December of 2005 - each give $44,000 (4 times $11,000) and as of
January 2006 give another $48,000 (4 times $12,000). So a couple could give up to
$88,000 gift tax free at the end of 2005 and up to $96,000 during 2006 and pay no gift
tax. That's close to $200,000. If this couple were to make maximum annual
exclusion gifts year after year for the rest of their lives, they can give away - possibly
millions - gift tax free! And of course, if the donees leveraged those gifts - by
investing the gifts they receive each year and/or by buying life insurance on the life of
the donor (or donors) - an astounding amount of income, estate, and probate free
financial security could be assured for them.
Of course, annual exclusion gifts can be made directly to individuals, or to special
irrevocable trusts or Uniform Transfers to Minors Accounts for children and
grandchildren. And don't forget that transfers made directly to medical care providers
and educational institutions for qualified purposes are also gift tax exempt.
Also, up to $1,000,000 additional (once in a lifetime exemption) gifts "per donor"
can be made without incurring any out-of- pocket gift tax! That’s $2,000,000 per
couple! If just the interest on that $2,000,000 were used as an engine to pay life
insurance premiums on the life or lives of the parents, an incredible amount of
tax-free wealth could be assured for the next generation. Combine or mix and match
these opportunities and the amount of financial security that can be provided for
future generations is astounding!
Any discussion pertaining to taxes in this communication (including attachments) may be part of a
promotion or marketing effort. As provided for in government regulations, advice (if any) related to
federal taxes that is contained in this communication (including attachments) is not intended or written
to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue code.
Individuals should seek advice based on their own particular circumstances from an independent tax
advisor.
Securities offered through Lincoln Financial Advisors Corp., a broker/dealer. Insurance offered through Lincoln affiliates
and other fine companies.
Advisory services offered through Lincoln Financial Advisors Corp., a registered investment advisor, or Sagemark
Consulting, a division of Lincoln financial Advisors.
This material is for information purposes only. We do not offer tax or legal advice. Seek the advice of a tax advisor prior
to making a tax-related insurance/investment decision.
CRN # 200602-1005459
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